Tuesday, 13 December 2016 12:33

The new UAE Commercial Companies Law

The new UAE Commercial Companies Law no. 2 of 2015 (the “CCL”) came into force on 1st July 2015 and substitutes the old Commercial Companies Law in its entirety.  

All companies are required to amend their existing Articles of Association to reflect and comply with the changes introduced by the new CCL, and any companies failing to do so by 30th June 2016, will be automatically dissolved.

Several implementing regulations and decrees of the new CCL are yet to be enacted to give effect to some of the newly introduced provision such as the establishment of the Registrar which is the body that is entrusted with handling the trade names registrations, among other things.

The absolute exceptions from the application of the old CCL granted to oil companies, electricity and water desalination companies has been abolished and replaced by a different concept. Exceptions to the new CCL are now granted to a) special entities by virtue of a resolution of the Council of Ministers; or b) to entities wholly owned by the Federal Government of Local Government or wholly owned affiliates of such entities; or c) entities in which the Federal Government or the Local Government owns directly or indirectly a 25% stake operating  in the field of oil exploitation, power, electricity and water desalination industries; or d) entities exempted by a special federal law.   
The CCL does not affect any of the entities that have been exempted from the application of the old CCL under the auspices of the latter. Those entities continue to enjoy the status afforded to them.

 

General Changes applicable to all type of companies (Limited Liability Companies, Public Joint Stock Companies and Private Joint Stock Companies.

1. Holding Companies (New CCL – Art 266)
- LLCs and JSCs are now permitted to be established as holding companies in order to conduct business activities solely through their relevant subsidiaries.

By recognizing the concept of a “holding company” under the new CCL, the UAE will become more appealing, as a jurisdiction, to large corporate groups when they are considering restructuring or establishing a presence in the UAE.

2. Foreign Ownership (New CCL – Art. 10)
New provision explicitly invalidating any transfer of shares which may affect the minimum UAE national shareholding of 51%

Despite much speculation, the new CCL retains the same approach as the old CCL in relation to the foreign ownership restriction, i.e. 51% (UAE National) / 49% (foreign), or 100% GCC nationals.  However, the UAE government is considering relaxing the requirement of such restrictions in certain industry sectors under a new FDI regime (timing of which is unclear at the moment).

3. Single Shareholder Ownership (New CCL – Art 8)
Companies including Limited Liability Companies (LLC’s) may be formed by a single shareholder as opposed to the old CCL in which a minimum of requirement of 2 shareholders has been in place.  In this case, the name of the company shall bear the name of the single shareholder.

However having said this, the 51%-49% holding is still in force and hence the current law remains to be observed.  Moreover, this option may only be applicable without prejudice to the local shareholding requirement. 

4. Companies Registrar (New CCL – Art 33-38)
The Minister of Economy shall issue a regulation setting out the activities and functions of the Companies Registrar.  In particular, the Companies Registrar shall supervise the trade name register (to avoid double registration), hold company records and enable concerned parties to inspect the relevant company records.

5. Duties of Managers / Directors (New CCL – Art 22 & 24)
The duties/liabilities of managers and directors have been reinforced.  The “person” delegated to manage a company must a) preserve the rights of the company, b) exert the efforts of a prudent (sensible) person and c) carry out the all the acts in compliance with the objectives of the company and in line with the powers afforded to him/her by the company. 
The CCL has also addressed the issue of limitation of liability and has stated that any provisions in the AOA permitting a company or any of its affiliates to limit the personal liability of any person from acts carried out in his/her capacity as holding office in the company shall be null and void.

6. Financial Assistance & Loans to Directors (New CCL – Art 222 & 153)
The Central Bank now prohibits loans and any financial assistance to Directors of companies as well as to their spouses/children who hold a 20% share profit of the company.

7. Transfer of Shares (New CCL – Art 10) 
Under the new law, any transfer of shares in violation of the 51% local shareholding will be null and void. However, the CCL does not address the concerns related to the annulment of the share transfer and how the assets of the company will be dealt with, if the sanction is not the annulment of the company, but the annulment of share transfer. The general principles of annulment will apply.

The new FDI law may have an implication on foreign holding. Free zone companies of certain sectors will be allowed to work onshore.

8. Accounting Records (New CCL – Art 26)
All companies are required to keep accounting records at their relevant head offices for a minimum period of 5 years.  In addition, all companies shall apply international accounting standards and practices when preparing their relevant accounts in order to give a clear and accurate view of the profit and loss of the relevant companies.
All audited accounts for each financial year need not be published, but filed with the Ministry of Economy and Department of Economic Development.

The aim is to bring accountability and transparency of a company up to international standards. Consequently, a company should be able to accurately reveal, at any time, the financial position of the company, and enable shareholders to verify that the company's accounts are properly kept in accordance with the new CCL. 
It is helpful that the new law permit companies to retain electronic versions of their documents (provided that such documents will be saved in compliance with a decree to be issued by the Minister of Economy).

9. Corporate Social Responsibility
Regulations yet to be discussed and enforced.

10. In-kind Contributions
In-kind contributions are evaluated by independent financial advisors (Old law :  a government committee)

11. Sanctions & Penalties
Both penalties and sanctions have been tightened.  However, there is a likelihood of more abuse and more risks applicable to Directors / Managers.

12. Free zone Companies (New CCL – Art. 5)
In general the new CCL shall not be applicable to free zone companies. However, if the laws of the free zone permit certain free zone companies to operate outside the relevant free zone (i.e. onshore), then the new CCL shall be applicable to such free zone companies.

Allowing certain free zone companies to operate onshore will provide greater business flexibility/mobility and, therefore, it is logical for such free zone companies to be subjected to the new CCL. However, it is unclear how this will work in practice, as the Federal Cabinet is yet to issue a resolution to determine the conditions and requirements to register free zone companies to operate outside of the relevant free zone.

 

Impact of CCL on Limited Liability Companies

Whilst there are numerous positive aspects of the new CCL in relation to limited liability companies, there are some provisions that require further reflection and careful consideration;

1. Minimum Capital (New CCL – Art 76)
Prior to 2006, the old CCL had originally provided for an AED 150,000 minimum capital.  In 2009, the minimum capital had been abolished and replaced with a reference to “adequate capital requirement”  (although in practice, some activities were still subject to a minimum requirement).  With the new CCL, the “adequate” reference remains the same but with the possible issuance of a decree setting minimum capital requirements.
An express restriction has been imposed on the release of capital deposited by LLC’s under incorporation.  Banks may only release the capital upon the submission of evidence confirming the completion of the registration process of the company.

2. General Assembly Meetings (New CCL – Art 92-100)
 A General Assembly consisting of all partners should be convened at least once in a year during the four months following the end of the financial year of the company.
 Invitations to shareholders meetings may now be sent by any method/means, and not necessarily by registered courier as per the old CCL, provided that the AOA stipulates the permitted means of notification.
The pre-notification period for general assembly invitations has been reduced from 21 days to 15 days, unless the shareholders agree on a shorter period.
The minimum attendance quorum has been increased from requiring the attendance of shareholders holding 50% of the share capital to 75%. If the quorum is not met in the first meeting, another meeting should be called for, after observing a notice period of 14 days, and this second meeting shall be valid if attendance by shareholders holding 50% of the share capital. If the quorum is not met in the first two meetings, a third meeting is called for, after observing a notice period of 30 days, and this third meeting shall be valid with no minimum quorum requirement.
Minutes of the meetings need to be recorded and entered in a special register to be kept at the head office of the company. Any partner may inspect the minutes in person or by proxy and may also inspect the balance sheet, the profit and loss account and the annual report.

3. Restrictions on Share Transfer (New CCL – Art. 79)
This provision will place the shareholders in a better position in the discussions with the notary public when restrictions are commercially agreed between shareholders.
The AOA of a LLC may contain “restrictions on share transfer” wherein protections may now be included (e.g. lock up, etc.)

4. Maximum number of directors / managers (New CCL – Art. 83)
The management of an LLC can be undertaken by one or more directors/managers as determined by the company’s memorandum and articles of association or the general assembly of the company.

Removing the cap on the number of directors/managers appointed to an LLC will allow for greater business flexibility and networking, and enable talented external advisers to sit on the board of directors/manager.

5. Non-compete by directors/managers (New CCL – Art.86) 
Other than with the consent of the general assembly of the company, a director/manager is not permitted to manage another competing company (including another company with objects similar to the company)

This new non-compete provision is consistent with the new directors/managers duties provision and they should be mindful not to breach this new non-compete provision as, otherwise, they maybe dismissed and required to compensate the company.

6. Pledges of Shares (New CCL – Art. 79)
Pledges over the shares of a LLC are permissible provided that the pledge is recorded in a notarized document and registered in the commercial registration of the company.  A question round the enforceability of this pledge remains questionable and the logistical procedures are yet to be regulated by the authorities.

By introducing a new provision for perfecting security by way of share pledge over shares in an LLC, it should improve access to debt financing as shareholders will now be able to grant security over their LLC shares. However, it remains unclear how the new provision will be interpreted as the New CCL is silent in respect of the concepts of “share certificate” or “number/registered shares” attributed to any shareholder in an LLC.

7. Pre-emption rights in LLCs (New CCL – Art 80)
If an existing shareholder exercises its pre-emption right but disagrees on the sale price offered by the selling shareholder, said existing shareholder is entitled to require the Department of Economic Development to appoint an independent expert (financial and technical), at its own expense, to evaluate the shares.
In other words, the existing shareholder may exercise its pre-emptive right without being bound to the sale price determined by the selling shareholder in the sale notice and hence, the selling shareholder will not be freely entitled to sell to another buyer until the evaluation is fully completed. This could have implications, and cause possible delays, on the sale of shares of legal vehicles set up through side agreements with local shareholders.
The AOA should clearly emphasize on the timings, procedure, etc. on pre-emption rights.
Shareholders Agreement is very important and should clearly define all grey areas.

 

What do companies need to do?

1. Watch out for all anticipated new implemented regulations and seek legal advice before proceeding with any activity or act that has been re-regulated by the CCL.

2. Review the Articles of Association of the Company and amend the necessary before the expiry of the grace period, until 30th August 2016.

 

Reference
- Backer & McKenzie, Habib Al Mulla
- PWC Legal Middle East

Contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information or assistance.

 

 

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